Investors often put their money in both stocks and bonds with the objective to diversify their investment portfolio. Regardless, the extent up to which one should expose their portfolio to these investment options depends on multiple factors like risk appetite, time horizon and financial goals. Individuals, thus, need to be aware of bonds vs stocks and their underlying differences to ascertain the ideal investment ratio.
In a general sense, bonds are debt instruments. In other words, they are loans made out to an organisation. Being a debt, they appear as liabilities in a company’s balance sheet.
Bonds come in handy to raise funds, and they provide fixed returns in the form of interest. One must note that any organisation can issue a bond, including – governments, non-profit organisations, corporations, etc.
The bond market is known as the – credit market or simply the bond market. Generally, bonds are traded on stock exchanges. However, in terms of transactional volume, they are much lower than stocks.
Some prominent features of bonds include –
Broadly there are four types of bonds, namely –
Fundamentally, stocks are instruments of equity investments, and each unit of share tends to represent ownership or stake in a company. They are considered to be quite liquid when compared to fixed income instruments.
When a business entity intends to raise money, they issue shares and invite investors to purchase the same. In exchange, the investors gain a percentage of ownership in the company, the right to vote and receive excess profits.
It must be noted that only sole proprietors, corporations and partnerships can issue stocks, which are put forth as IPO or during equity sales. This is indeed one of the fundamental bonds vs stocks points of distinction. Ideally, stocks are traded on the NSE or BSE.
These are among the most distinctive characteristics of stocks –
It must be noted that stocks can be classified under two categories, namely –
In general, the types of stock classification include –
Nevertheless, to find out bonds vs stocks – Which one is ideal for an individual, one needs to factor in the differences between the two and analyse them carefully.
This table below highlights the primary difference between bonds and shares –
|Meaning||Bonds are funds that replicate the performance of the benchmark market index.||Stocks are instruments that focus on the prospect of ownership extended by companies in exchange for funds.|
|Type of instrument||Bond is a debt instrument.||Stock is an equity investment.|
|Issuance||Under normal circumstances, bonds are issued by the –
||Typically, stocks are issued by –
|Status||Bondholders serve as lenders to the company.||Individuals who hold the stocks are considered to be owners of the firm.|
|Returns||Investors receive a fixed repayment in the form of interest.||Stockholders earn dividends, but they are not guaranteed. It is because stocks are heavily dependent on the issuer’s performance.|
|Benefits||The bondholders are given priority during repayment and liquidation.||The stockholders gain voting rights.|
|Risk level||Bonds are rated by the credit rating agencies, and they mostly yield a fixed income. Collectively, these make bonds a less risky alternative for many.||In stocks, the associated risk level is relatively high. It is because investors do not earn fixed returns.|
|Tax burden||A bondholder is not necessarily exposed to any tax liability.||Shareholders may have to pay the Dividend Distribution Tax or DDT on their returns.|
|Participants||The major participants are the investors, institutional investors and speculators.||The main participants are market makers, traders and brokers.|
|Market||They are traded Over The Counter (OTC).
Generally, the bond market does not have any centralised trading or exchange system.
|Shares are traded through stock exchanges.
The stock market has a centralised trading or exchange system.
Individuals must factor in all these aspects to make an informed decision about investing. In turn, it will help to understand bonds vs stocks, which one is better for their financial requirements.